3.07 Founder agreements: roles, decision rights, deadlocks

1. Core idea and who it's for#

A founder agreement puts on paper what co-founders have agreed about who does what, who decides what, what happens when they disagree, and what happens when someone leaves. It is usually written before or at incorporation, and later absorbed into the company's formal documents. The main principle is to write it while you still like each other . Every clause is cheap to agree on day one and very expensive to negotiate in the middle of a dispute.

It covers six things:

Roles and responsibilities: who leads what, with titles agreed (3.08).
Commitment: full-time from when, permitted outside activities, and academic posts (2.12, 3.10).
Equity and vesting: the split, vesting, cliff and acceleration (3.05, 3.06).
Decision rights: what each founder decides alone, what needs both (or a majority), and what needs board or shareholder approval.
Deadlock: how ties are broken, especially in a 50/50 company.
Leaving: good and bad leaver terms, buyback of unvested and vested shares, nonsolicitation and confidentiality (3.12).

Plus the base layer: IP assignment of everything each founder created for the company, including work before incorporation, and confidentiality (2.01).

Investors will replace much of this with their own documents at the first priced round, through a shareholders' agreement, articles, voting agreements and protective provisions. A good founder agreement still matters. It sets the founders' starting positions, it governs the pre-seed period, and its leaver and IP terms carry through into the investors' documents.

Who this is for: co-founding teams forming a company or about to raise, and anyone joining as a co-founder (3.09).

Equal ownership without a tie-breaker is a design flaw. One legal explainer puts it simply: a pure 50/50 split with no tie-breaker is a design flaw, not fairness, and a deadlock mechanism should be built into the shareholders' agreement before you ever hit a deadlock (Startingup, summarising SPZ Legal). A common structural cause of deadlock is two founders with 50% each, both directors, with no casting vote and no agreed exit route (Sprintlaw).

The menu of deadlock mechanisms, from gentlest to most drastic:

Mechanism	How it works	Notes
Decision areas	Each founder has final say in a defined domain: CEO on commercial, CTO on technical	Prevents most deadlocks. Define the domains precisely
Escalation and cooling- off	A defined deadlock (for example, unresolved after two meetings) triggers a structured discussion period	Cheap. Forces a pause
Mediation	A neutral mediator helps the parties reach a solution	Non-binding. Works best early ( Setfords)
Casting vote or tie- breaker	The chair, or a named third person such as an independent director or trusted adviser, breaks ties on board matters	Simple, but can undermine the equal bargain founders thought they had( Sprintlaw)
Arbitration	A binding decision by an arbitrator on defined disputes	Final and private, but costly
Buy-sell (shotgun or Russian roulette)	One party names a price, and the other must either buy or sell at that price	A last resort. Favours the founder with more cash. Rare in startup shareholders' agreements in practice ( e27)
Texas shoot-out	Sealed bids, and the highest bidder buys	Similar caveats ( Startingup)

The useful distinction is between prevention , meaning decision areas, a casting vote, an independent director and supermajority thresholds, and cure , meaning mediation, forced buyouts or winding up. The aim is to write prevention into the agreement so you never need the cure (Startingup, on South Bank Legal).

Default rules may surprise you. In UK companies, the standard model articles give the board chair a casting vote, but many 50/50 companies expressly exclude it, and founders are often surprised to find which way their articles go (Setfords). Check your company's actual constitution.

For venture-backed startups, deadlocks increasingly get resolved through the board. After the seed round, a board of two founders plus one investor, or a 2-1-1 board with an independent director, provides a natural tie-breaker. That is one reason to plan board composition carefully (area 15).

3. Method: draft the commercial terms yourselves, then have a lawyer formalise them#

Step 1. Write a two-page term sheet together. Use the checklist below. Do it in one or two working sessions, after the values conversation (3.03).

Section	What to decide
Roles	Titles, areas of ownership, who leads fundraising, and who signs contracts up to what value
Commitment	Full-time start dates, time allowed for academic or other work, and conflicts to disclose
Equity	Split and rationale (3.05). Vesting: 4 years, 1-year cliff, with credit for prior work if agreed. Acceleration (3.06)
Decision rights	Solo decisions in each person's area, joint decisions (hiring founders or executives, spending above₹X / $X, changing strategy, fundraising terms, new co- founders, debt), and which matters go to the board or shareholders
Deadlock	The definition of deadlock, an escalation period, mediation, the tie-breaker (a named adviser or future independent director) and the last-resort mechanism
Compensation	Founder salaries before and after funding (3.13), and expense rules

Section	What to decide
Leaving	Good leaver, bad leaver and early-leaver definitions; the price for buying back unvested shares (usually cost) and vested shares in a bad- leaver case; transfer restrictions (3.12)
IP and confidentiality	Assignment of all prior and future company-related IP, including code, data, lab notebooks and inventions, subject to any university licence (2.01, 2.07)
Restrictions	Non-solicitation of staff and customers, and non- compete where enforceable (section 4)
Review	Revisit roles and terms at each funding round, or every 12 months

Step 2. Pick a tie-breaker now. Name a person you both trust: a mentor, a senior adviser or an incubator director. Agree that they can break ties on defined matters until you have a board with an independent member.

Step 3. Get the IP assignment done first. Even before the full agreement, every founder should sign an IP assignment to the company (or a promise to assign it on incorporation). This is the clause investors check first.

Step 4. Have a lawyer turn the term sheet into documents. These are a founders' or shareholders' agreement plus articles (India and the UK), or a founder stock purchase agreement plus bylaws (US), as section 4 explains. Ask the lawyer to flag anything in your term sheet that won't survive a priced round.

Step 5. Revisit at the seed round. Investors' documents will add protective provisions, a board structure and drag-along and tag-along rights. Check your founder terms survive or are deliberately replaced, especially leaver terms and decision areas.

Worked example (illustrative)#

Two founders of a sensor company split equity 50/50. The CEO handles commercial matters and fundraising, and the CTO handles technology and the product roadmap.

Decision areas. The CEO decides alone on pricing, customer contracts up to $50,000, and marketing. The CTO decides alone on technical architecture, tools and suppliers up to $25,000. Joint decisions cover all hiring, spend above those limits, fundraising terms, adding founders, and any pivot.

Deadlock. A deadlock is a joint matter unresolved after two meetings at least a week apart. It triggers 14 days of cooling off, then a session with their named tie-breaker, a former CEO who mentors them. On joint operating matters (not equity or founders), her decision binds until the seed round. After the seed round, the board decides.
Leaving. A good leaver keeps vested shares, and the company can buy unvested shares back at cost. A bad leaver, for gross misconduct or breach of the agreement, sells vested shares back at the lower of cost and fair market value.
No shotgun clause. Their lawyer advised against one, because the CTO has less personal cash, so it would favour the CEO.
Two years later, the founders disagree over whether to take a strategic investor. The deadlock process forces a structured discussion, and they agree on a smaller round with the strategic investor as a minority.

4. India / US / UK: the legal instruments#

India#

The documents are a founders' agreement or shareholders' agreement (SHA) plus the articles of association (AoA). Terms must be reflected in the AoA to bind the company, so investors will insist the SHA and AoA match.
Vesting for founders is contractual reverse vesting, implemented through buyback or transfer provisions in the SHA and AoA. There's no statutory concept of unvested shares (3.06).
Non-competes after leaving are generally unenforceable under section 27 of the Indian Contract Act. Rely on confidentiality, non-solicitation and IP assignment instead.
Buyback mechanics. Company buybacks under section 68 of the Companies Act have conditions. Leaver provisions often use transfers to other founders or a nominee instead. Ask your lawyer.
Stamp duty applies to agreements and share transfers. Budget for it.

US#

The documents are a founder stock purchase agreement (restricted stock with company repurchase rights for unvested shares), an IP assignment (often a confidential information and invention assignment agreement), bylaws, and sometimes a voting agreement among founders.
83(b) elections must be filed within 30 days of the restricted stock grant (3.06).
Board structure. Most decisions sit with the board, under Delaware law if incorporated there. Founder decision areas are usually internal policy, not legal constraints.
Non-competes: state law varies, and California voids most. Federal attempts to ban them have been contested in the courts, so take advice.

UK#

The documents are a shareholders' agreement plus articles of association. Many startups adopt BVCA-style or SeedLegals-style templates.
Model articles give the chair a casting vote unless excluded, so check (section 2).
Leaver provisions for founders usually sit in the articles, as compulsory transfer of shares on leaving, with good and bad leaver prices. BVCA's current model no longer treats voluntary resignation as automatically bad leaver (3.06).
Non-competes are enforceable if reasonable in scope and length. The government has proposed limiting employee non-competes, so check the current position.

Scripts#

Raising it with your co-founder:

"We get on well now, which is exactly why we should write down how we'll decide things and what happens if one of us leaves. It'll take two afternoons. If we never need it, great."

Asking someone to be your tie-breaker:

"We'd like to name you in our founder agreement as the person who breaks ties on operating decisions until we have a proper board. We hope we'll never call you. If we do, it would be a structured conversation with both of us. Would you be willing?"

Briefing your lawyer:

"Here's our two-page term sheet. Please turn it into the founders' or shareholders' agreement and articles. Tell us anything that's unusual, unenforceable here, or likely to be rejected by seed investors."

Common mistakes#

No agreement at all, or a handshake, until the first dispute or the first round.
50/50 with no tie-breaker.
Vague decision rights, where "we'll decide together" means nobody decides.
No IP assignment from each founder, which is the first thing investors check.
Leaver terms copied from a template without understanding good and bad leaver pricing.
Shotgun clauses where founders have unequal wealth.
Never revisiting the agreement as roles change (3.16).

2.01 Who owns your invention
3.03 Co-founder dating
3.05 Splitting founder equity
3.06 Founder vesting
3.08 Assigning titles
3.11 Resolving co-founder conflict
3.12 Co-founder breakups and leaver terms
3.13 Paying founders

Sources#

How do we handle deadlock when two co-founders own 50/50?, Startingup, summarising SPZ Legal and South Bank Legal
How to resolve deadlock in 50/50 founder situations, SPZ Legal
Company deadlocks: causes, prevention and options, Sprintlaw
How to navigate shareholder deadlock, Sprintlaw
50/50 shareholder deadlock, Setfords
Navigating shareholder disputes in startups, e27

The worked example is illustrative. This playbook is not legal advice: have a lawyer in your jurisdiction draft the final documents. Last checked November 2026.